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PowerPoint Presentation by
Gail B. WrightProfessor Emeritus of Accounting
Bryant University
Copyright 2007 Thomson South-Western, a part of The
ThomsonCorporation. Thomson, the Star Logo, and
South-Western are trademarks used herein under license.
MANAGEMENT
ACCOUNTING
8thEDITION
BY
HANSEN & MOWEN
12TACTICAL DECISION MAKING
STUDENT EDITION
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1. Describe the tactical decision-making
model.
2. Explain how the activity resource usagemodel is used in assessing relevancy.
3. Apply tactical decision-making concepts in
a variety of business situations.
LEARNING OBJECTIVES
Continued
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4. Choose the optimal product mix when faced
with one constrained resource.
5. Explain the impact of cost on pricingdecisions.
6. Use linear programming to find the optimal
solution to a problem of multipleconstrained resources. (Appendix)
LEARNING OBJECTIVES
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TACTICAL DECISION MAKING:Definition
Consists of choosing among
alternatives with an immediate
or limited endin view.
LO 1
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STRATEGIC DECISION MAKING:Definition
Is selecting among alternativestrategies so that long term
competitive advantage is
established.
LO 1
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TACTICAL MODEL
A general approach to tactical decision makingincludes:
1. Recognize, define the problem
2. Identify alternatives, eliminating those that areunfeasible
3. Identify costs & benefits
4. Total relevant costs, benefits of eachalternative
5. Assess qualitative factors
6. Select alternative with greatest overall benefit
LO 1
Assess qualitative factors
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TIDWELL PRODUCTS:Background
Tidwell Products Inc. is facing expanded
production that is straining the capacity in
facilities with 5 years remaining on theirlease. Two feasible alternatives under
consideration are a)to rent an additional
building for warehousing and b)outsource
production. The CFO will prepare a report of
detailed costs for these alternatives.
LO 1
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APPLYING TACTICAL MODEL
LO 1
Step 1:Define the problem Increase capacity for warehousing
& production
Step 2:Identify alternatives 1. Build new facility
2. Lease larger facility; sublease
current facility
3. Lease additional facility
4. Lease warehouse space
5. Buy shafts & bushings; free
up space
Continued
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APPLYING TACTICAL MODEL
LO 1
Step 3:Identify costs, benefits Alt 4: + Benefits
Alt 5: + Benefits
Step 4:Total relevantcosts &
benefits
Alt 4:Relevant + Benefits
Alt 5:Relevant + Benefits
Differential cost
Step 5:Assess qualitative factors 1. Quality of external supplier
2. Reliability of external
supplier
3. Price stability4. Labor relations & community
image
Step 6: Make decision Continue producing & lease
warehouse
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RELEVANT COSTS: Definition
Are future costs that differ
across alternatives.
LO 1
differ across alternatives.
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RELEVANT VS. IRRELEVANT
COSTS
LO 1
Cost to Make
Cost Not to
Make
Differential
Cost
Direct labor $ 150,000 --- $ 150,000
Depreciation 125,000 $ 125,000 ---
Allocated lease 12,000 12,000 ---
$ 287,000 $ 137,000 $150,000
Direct laboris the relevant
cost because it differs between
alternatives.
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MANUFACTURING FIRM:Background
A manufacturing firm employs five (5)
engineers with a capacity of 10,000
engineering hours (2,000 hours each) ata cost of $250,000 ($25 per hour). The
firm expects to use only 9,000
engineering hours during the currentyear, producing unused capacity.
LO 2
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Should the firm consider
accepting a special order thatuses 500 engineering hours?
Yes.The firm should consider
accepting the special order, if it is
otherwise profitable, because it
will be completed with unused
engineering capacity.
LO 2
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SWASEY MANUFACTURING :Make-or-Buy Background
Swasey Manufacturing, a printer
manufacturer, will switch to a printer that
does not use an electronic component itcurrently produces. Should Swasey
produce 10,000 components for the older
printer this year or should they purchasethe component for $4.75?
LO 3
Continued
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SWASEY MANUFACTURING:Relevant Information
LO 3
Make Buy Cost to Make
Equipment Rent $ 12,000 --- $ 12,000
Direct materials 5,000 --- 5,000
Direct labor 20,000 --- 20,000
Variable overhead 8,000 --- 8,000
Purchased cost --- $ 47,500 (47,500)
Receiving Dept labor --- 8,500 (8,500)
Total $ 45,000 $ 56,000 $ (11,000)
Alternatives Differential
O 3
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NORTON MATERIALS:Keep-or-DropBackground
Norton Materials produces 3 products:
blocks, bricks, and tile. The tile segment
has a negative segment margin and doesnot contribute to common fixed
expenses. Should Norton drop the tile
division?
LO 3
Continued
LO 3
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NORTON MATERIALS:Keep-or-Drop
LO 3
Blocks Bricks Tiles Total
Sales $ 500 $ 800 $ 150 $ 1,450
Less Variable exp. 250 480 140 870
Contribution margin $ 250 $ 320 $ 10 $ 580
Less direct fixed exp
Advertising $ 10 $ 10 $ 10 $ 30
Salaries 37 40 35 112
Depreciation 53 40 10 103
Total $ 100 $ 90 $ 55 $ 245
Segment margin $ 150 $ 230 $ (45) $ 335
Less Common fixed exp 125
Operating income $ 210
Continued
LO 3
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NORTON MATERIALS :Keep or DropAnalysis
LO 3
Because Norton will lose sales in both
blocks and brick if ceiling tiles are
dropped and replacing ceiling tiles with
floor tiles is less profitable, the firm is
better off to keep the ceiling tile
division.
LO 3
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ICE CREAM:Special Order Background
An ice cream company is operating at 80%
of its 20 million gallon capacity. The
company receives an offer to purchase 2million gallons for $1.55 per gallon. This
is below the wholesale price of $2.00.
Should the company accept the offer?
LO 3
Continued
LO 3
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ICE CREAM :Special Order Analysis
LO 3
Even though the special order price for 2
million gallons of ice cream is below the
normal selling price of $2.00, it will be
profitable because there is spare capacity
and only relevant variable costs are
considered in the decision.
LO 3
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JOINT PRODUCTS: Definition
Have common processes &cost of productionup to a
split-off point.
LO 3
cost of production
LO 3
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APPLETIME JOINT
PRODUCTION
LO 3
EXHIBIT12-3
LO 3
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APPLETIME :Process Further Analysis
LO 3
Even though processing grade B apples
further increases costs, there is more
profit to be made from making pie filling
than from selling grade B apples by the
bag.
LO 4
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CONSTRAINTS: Definition
Are limitations a businessfaces such as limited
resources or demand.
LO 4
LO 5
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PRICING: Legal Aspects
Predatory pricing
A means of setting price to eliminate competition
Dumping on international market
Price discrimination
Charging different prices to different customers
Price gouging
Using market power to set prices too high
LO 5
LO 6
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GRAPHING SOLUTION
LO 6
EXHIBIT12-4
Linear programmingdemonstrates the feasible
production region &
optimal solution for
complex problems.
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THE END
CHAPTER 12